The Earth is not flat. Towards a deep regionalized economy

The earth is not flat: transporting goods and human capital implies an enormous cost. International trade deep integration exposes regions to larger markets and higher competition, but also to external shocks. The idea of ​​ an economically globalized world with the massive openness of the markets by the end of the 90s has not prospered as thought. The global economy, actually, has become more regional. This is not limited to nearshoring in a strict sense of exchange of goods. Most economic interactions occur within regional frameworks.


The idea of ​​a regionalized economy goes beyond international trade. People go on vacation to international destinations near their country rather than hop continents. Migrants usually also prefer to work in places close to their place of origin. The consumption of art, digital media and news from a foreign country also has a profound relationship with how close that country is to theirs.


At the level of international trade this appreciation is even more measurable. In most cases, the volume of goods traded is greater in relation to the region. Over the past ten years, trade openness has generally improved in OECD regions. For the 17 nations for whom data was available, the percentage of imports plus exports over GDP climbed from 60% to 69% between 2010 and 2018.  In public policies, the priority is regularly the neighbors, both in trade restrictions and in immigration policies. While it is true that recent examples such as vaccine production prove the existence of global supply networks, the highest level of production companies operate around regions. Offshoring tends to be more common in low economic impact industries. Perhaps the most concrete and plural example is the automotive industry, which in North America and Europe accounts for the main economic activity. In that sense, talking about “global” supply chains in those specific sectors might be a misnomer. Most industries work around regional spaces.


Why did the world not become as globalized as thought by the end of the last century? 


This question can be answered in three ways. First, the economic costs of transporting merchandise. Second, the unexpected  conflicts that have arisen in the 20th century. Three, the regionalization of the economy does not necessarily imply deep integration processes


For instance, the transportation of agricultural products usually takes place beyond the regional order only if there is a clear comparative advantage. To Illustrate this, I can recall the imports of thousands of tons of South African corn to Mexico due to the numerous restrictions with the regional product.  Only in those very special cases is it more convenient to have goods cross the Atlantic rather than buying what is on the other side of the border. However, there is a profound tendency for the total cost of trading goods to be lower over a reduced distance. In that regard, it is also important to mention the volatility of long-distance transportation; compromised by conflicts that often escape the decisions of the States that trade.


International conflicts play a crucial role in why States prefer to trade with the closest countries. For example, last year there was a significant shortage of several pesticides manufactured in Israel with inputs from Eastern Europe due to the conflict between Russia and Ukraine, prices in that market skyrocketed and millions of dollars were lost in the agricultural sector. Another clear example is the risk inherent in non-political events such as pandemics. The world does not seem to be prepared  to sustain a global supply chain.


Perhaps the most important reason why international trade has generally prospered is because there is no real need to subscribe to international treaties that cede sovereignty. Most trade within regions is quite comfortable.Regions do not become necessarily more integrated at the same time as they become more interdependent. The barriers to the market do not disappear while trade flow increases. What is mostly seen in regions is a process of regionalization, led by spontaneous commercial flows that arise due to the proximity of the parts. Trade interactions do not necessarily mean political will of States but rather an understanding of private actors about the advantages of trade.



What really generates regionalism?


The integration of the regions is market-oriented. Katzenstein's normative theory, for example, suggests that cooperation and the emergence of supranational instruments increase as the volume of trade between two or more states develops. This theory was useful to explain the emergence of the European Union as a successful case of economic and political integration. However, in light of the emergence of new economically important regional areas, the functionalist thesis seems insufficient. In Southern Africa there are a significant number of supranational mechanisms and regulatory offices for international trade, despite the fact that buying and selling between countries in the region is quite lax. In Southeast Asia the paradigms are similar. There are more categorical theories about what does and does not produce integration at the level of supranational agreements. However, generally the mere fact of sharing borders is an incentive for cooperation. Hatfel outlines it precisely: neighboring states have a close economic relationship; politically they may or may not be enemies, but usually, their common economic future is enough for there to be incentives for integration. Even it is pure marked-oriented.